Look Past Home Runs; Seek Strong Hitters

Like many investors, Kris Yi is searching for a hot mutual fund to buy for 2000. And like many of us, she says she can’t help but be influenced by the record-breaking performance of many stock funds last year.

“I had no idea you could double your investments in a year,” says the 37-year-old clinical psychologist who lives in Los Angeles.

Right now, Yi is leaning toward the $4.9-billion Janus Global Technology fund. “I already own shares in the Janus family of funds,” she says. Plus, this technology-sector fund soared an eye-catching 212% in 1999, which can’t hurt, right?

Actually, yes it can.

Yi has heard all of the warnings: “Past performance is no guarantee of future returns.” But past performance has never been this good. An unprecedented 171 funds more than doubled their investors’ money last year. Twenty funds tripled in value in a single calendar year.

And mutual fund companies aren’t about to let investors forget it. In this business, when you’ve got it, you flaunt it, because you never know when you’re ever going to have it again.

Just ask Heiko Thieme, whose American Heritage fund went from being the absolute best-performing world stock fund in 1997 to being the absolute worst in 1998 and again in 1999.

So brace yourself for a self-congratulatory blitz of ads. “Performance will be used as an advertising concept more in this year than in the past couple of years,” notes Marcia Selz, president of Marketing Matrix, a Los Angeles-based marketing research firm that specializes in the financial services industry.

Meanwhile, “Investors will do what they always do,” says David Prichard, senior vice president for TCW Funds Management in Los Angeles. “They’ll look at last year’s winners.”

“I’m not a prognosticator,” he says, “but that could be the worst place to be” in 2000 and beyond.

Indeed, investors who recently jumped into highflying technology-sector funds, trying to ride last year’s momentum, are already feeling queasy as tech stocks across the board were pummeled last week. The average tech fund lost 9.4% in the first four days of last week as the sector took a drubbing. Some, such as ProFunds UltraOTC, lost considerably more. In just three days last week, from Tuesday through Thursday, this $708-million tech-heavy fund tumbled 23%.

Of course, it’s been only a week, and the tech sector’s Friday rebound may well continue.

But there’s another reason you may not want to pile into last year’s absolute biggest gainers among funds. Last year’s “hottest” funds are apt to get most of the publicity this year. And history has shown that once a bright light shines on a hot fund, investors swarm around it like mosquitoes to a bug zapper.

If too much money flows into a fund too quickly, its manager may have difficulty putting it all to work effectively, and the performance of the fund may suffer for that reason alone.

A better idea, says David Masters, senior fund analyst with Standard & Poor’s Fund Services in New York, is to look for funds that had a good year in 1999, and also have been consistent performers over the long term.

In other words, don’t look for the home-run hitters, but the .300 hitters.

There’s a good chance that many of these consistent funds will be overlooked by other investors interested in only what’s red-hot. And if momentum-minded shareholders haven’t heard of a fund, they can’t wreck it by jumping on the bandwagon.

Plus, if a fund performs consistently rather than alternately running hot and cold, chances are shareholders will stay with it for the long term, thus stabilizing its asset base and long-term performance.

But how do you find a good, consistent fund that is unlikely to be overwhelmed by new money this year?

One way is to search out strong fund managers who have recently jumped ship to either start or manage new portfolios. Two names come to mind: Glen Bickerstaff and Fred Kobrick.

Bickerstaff used to manage Transamerica Premier Equity. Under his leadership, that fund ranked as the 11th-best large-growth portfolio in 1996 and the third best in 1997, according to fund-tracker Morningstar. In 1998, Bickerstaff left Transamerica and moved across the street--and into relative obscurity among retail investors--to TCW Group Inc. to manage mostly institutional money.

Last year, however, TCW began a major push into the retail mutual fund market, and the institutional fund Bickerstaff runs, TCW Galileo Select Equity, was opened to the general public for a minimum initial investment of just $2,000.

So far, the retail shares of this fund have attracted only about $20 million. In total, the fund has less than $350 million in assets, but company officials estimate the fund has the capacity to grow to between $10 billion and $15 billion without hurting performance.

While Legg Mason Value fund manager Bill Miller is well-known for beating the benchmark Standard & Poor’s 500 index of blue-chip stocks for nine consecutive years, few investors know that Bickerstaff has done it 10 straight years and 11 out of the last 12, when you measure the performance of his institutional and retail funds combined.

And he did it without owning any of the so-called pure Internet plays such as Amazon.com, America Online or Yahoo.

Bickerstaff says he only invests in generally established companies that lead their respective industries. He also favors companies with a “product advantage” (such as Intel, which dominates computer chips) or “cost structure advantage” (such as Dell Computer, which has led the way in direct PC sales). He has owned Intel for a dozen years and Dell since 1994.

Like Bickerstaff, Fred Kobrick has an impressive resume. Kobrick--known for grilling chief executives about their business plans and walking factory floors to ferret out a company’s strengths and weaknesses--led the State Street Research Capital fund to gains of 19.9% a year from 1993 to 1997, versus 19% for the S&P; 500.

Three years ago, he struck out on his own. Today, he manages the $115-million Kobrick Capital fund. Thanks to a 55% stake in tech recently, that fund soared 73% in 1999 after rising 50% in 1998. All told, Kobrick’s various funds delivered combined returns of 581% through the ‘90s. That’s more than 100 percentage points better than the S&P.;

Here are some other relatively low-profile stock fund managers with great long-term track records:

* David Alger. Alger’s Spectra fund ranks as the top-performing diversified stock fund of the ‘90s, racking up gains of 29.2% a year, versus 18% for the S&P; 500. Alger’s fund also finished in the top 10% of its peers over the last one, three, five, 10 and 15 years.

Still, neither he nor his fund are household names. One reason is that this $629-million large-growth fund, which invests aggressively in tech, started as a closed-end fund and only converted to open-end status in 1996.

* The Calamos Family. John, Nick and John Jr. are best-known as convertible bond fund managers. Their Calamos Growth & Income fund, for instance, ranks as the best-performing convertible fund over the last five years.

But the family also runs an outstanding mid-cap growth stock fund, Calamos Growth, which has not only beaten its peers, but also the S&P; 500 over the last one, three and five years. Yet this fund has attracted less than $40 million in assets thus far.

* Herbert Ehlers. His Heritage Capital Appreciation fund has trounced the S&P; in six of the last nine years--and with significantly less risk than the Vanguard 500 fund, which tracks the S&P.; Still, the fund has attracted only $200 million thus far.

* William Oates. Northeast Investors Group is best-known for managing high-yield bond portfolios. But for 19 years, Oates has been quietly building one of the most consistent records in the stock fund industry. His $287-million Northeast Investors Growth fund has beaten the S&P; 500 over the last one, three, five and 10 years.

* Mark Regan. His fund, MFS Mid-Cap Growth, has handily beaten the average mid-cap growth fund over the last one, three and five years and without over-weighting tech stocks relative to his peers.

What’s more, though Regan invests in smaller, more volatile stocks than other mid-cap growth managers, MFS Mid-Cap Growth, with only $132 million in assets, is considered less risky than the average mid-cap growth fund, according to Morningstar’s proprietary risk measurement.

* Frederick Reynolds. Over the last one, three, five and 10 years, Reynolds Blue-Chip Growth has trounced the S&P;, while charging comparatively low expenses. Yet this 11-year-old fund still has less than $500 million in assets.

* Bob Turner. Turner’s large growth fund, Turner Growth Equity, gained 54% last year. In any other year that would have generated major headlines. But in 1999, so many funds generated 100%-plus returns that this $155-million fund remains overlooked.

Turner also co-manages Turner Micro-Cap Growth and Turner Midcap Growth. Those funds soared 144% and 126% last year, respectively.

* David Williams. Legg Mason’s Miller gets all the headlines for being one of the few value-stock managers to consistently beat the S&P; in the ‘90s. Miller did it, in part, by loading up on tech stocks such as America Online. By contrast, Williams’ Excelsior Value & Restructuring has beaten the S&P; over the last one, three and five years even with an under-weighted tech position.

Do you have ideas for mutual fund and 401(k) topics for this column? Times staff writer Paul J. Lim can be reached at paul.lim@latimes.com.